China will not be exporting cars to the West in significant numbers for four or five years. So says the man who is the new emperor of carmakers in China, Nick Reilly. Rob Golding recently sat down with him.
Reilly, once chairman of Vauxhall, is now president of GM Asia-Pacific and the biggest force in China. It was his strategy that pushed GM past VW which was the complacent early pioneer in China and has been losing ground. GM in China plans to make 1.2m cars this year, up from 877,000 in 2006. It has seen just over 50% annual growth in its sales since 2000. China therefore becomes the most important profit centre for the struggling group.
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Chinese auto exports are rising though and are expected to breach 500,000 this year from 350,000 in 2006. The cars are all going to South America, Southeast Asia or Eastern Europe.
Reilly admits that GM China did export 5,000 cars last year but to Chile and Russia. Russia has been identified as one of the eleven target markets in the world where GM can and should do well, and the cars sent there have been to fill out the range or meet delivery shortages.
The demands of the Chinese market and the speed at which it is growing mean that Reilly will always be reluctant to give up cars to other markets. Most regions of the world which have no domestic manufacture of GM product have an assembly site rather nearer than Shanghai.
“We are running really hard to keep up with Chinese demand. There is now very good acceptance for our brands. We have strong brand image and did very well in the China JD Power survey. There is no problem for us in GM having an American connection. The Chinese like it.”
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By GlobalDataThe same thing is even truer for domestic Chinese brands. They need to build for domestic demand and for them, export is that much harder because they have to buy or borrow a distribution network.
Any Chinese manufacture that aspires to grow must develop a strong brand. But the work starts from ground zero. The Chinese authorities may once have been determined to select and nurture its own independent national champions in the auto industry, but they now appear ambivalent.
Shanghai Automotive Industry Corp (SAIC) and First Auto Works (FAW) initially looked like being the strong companies because they were paired with the strong implants (in the case of SAIC there are joint ventures with both VW and GM). They got the cash flow that made them financially strong, but not sufficient expertise to float their own boats.
It then seemed that the manufacturers with an independent outlook would be the earliest to recreate Japanese-style exports of budget cars. Geely and Chery were, and still are, the two obvious contenders.
But there has been a subtle shift again. SAIC and FAW are cooperating strongly with the customers for whom they arrange assembly facilities. Reilly cheerfully admits that although SAIC has acquired the rights to ex-Rover cars (now sold under the Roewe brand) it is GM that is helping out. “They are keen to grow exports. We are working with our partner to help them to develop their own intellectual property.”
Chery has suddenly decided that it does not want to go it alone as an independent export pioneer and has teamed up with Chrysler. “That was bound to happen really. Chrysler needed somewhere in China and it had nowhere else to go.”
There is another reason why Chinese cars will not reach Europe or the US imminently. They are not cheap enough.
“There is no economic need to do it. China is not the most competitive source of cars for us. China cannot compete with Eastern Europe if you put the transport costs in. And the supply of components in China is still sub-optimal. Some things are in short supply and therefore expensive. Others are simply expensive.” Costs will go down, says Reilly. Then they will go up again as the market matures.
One of the clever things that GM did was move its Asian headquarters from Singapore to China and then set up Pan Asia Technical Automotive Center (PATAC). It was done in 2004 and enabled GM to leverage all its facilities worldwide to generate design, development, test and components. It is still not ripe enough to be generating its own IP though. “You cannot just create that culture overnight. PATAC could not yet design and build its own car.” Neither could Bosch in China for that matter. Neither is at the stage where they can innovate.
India is different. One of the things that Reilly will have to deal with is the different rates of development in his two territories of China and India. He does not say so but others say it for him: although India is coming from behind, the countries have different aptitudes. India has been outward-looking for longer. It has more of an engineering history.
On the other hand, China has been quick to invest in the infrastructure – roads in particular, but speculatively built factories also. It also has a vibrant machine tool and die industry – a foundation block for manufacturing industry.
GM has a little way to go achieve the sort of success in India that it has in China. But it is clear that Rick Wagoner, the beleaguered GM CEO, thinks that he has in Reilly the right man to make progress.
There has been a significant strategy shift in India. The simple strategy was to ship in the American behemoths that were attractive to the wealthy who wanted mass to broadcast their cash. Four years ago GM changed in favour of small cars and the mass market.
“Four years ago we started using GM Daewoo to feed the mini and small car market which is 80% of the market. We have doubled our share of that market but from a very low point.”
GM now sits in sixth place in the volume contest behind the two Indian domestic brands, plus Toyota, Suzuki and Hyundai.
“I want to get in the 7-8% market share range. Two years ago we had 1%.”
The entrenched locals will have advantages for some time. They are two generations of car behind Europe and the sophisticated Western makers will not be able to compete on price.
Nevertheless Reilly is looking at feasibility on a full assembly plant for a mini car at the moment. It would have to be 225,000-unit capacity to be viable. The probability is that it would be Matiz size and therefore designed and engineered at GM Daewoo in Korea. “Korea has been beyond our expectations,” says Reilly fondly. It is clear that Korea is now a key part of the supply chain for Asia.
Selling American product in Asia is not easy. Culturally it is fine. In fact in China, where the Japanese have a historic relationship problem, the US origin is an asset. But the American car does not have good ride and handling on tricky surfaces. And Americans just have no export experience at all. It all has to be learned.
Just as well then maybe, that on this occasion, in this territory, GM is led by a Brit.
Rob Golding
